Mark Mobius bullish on gold, oil and Southeast Asia

The Financial Post sat down with emerging markets guru Mark Mobius of Franklin Templeton Investments on Friday to talk about his outlook for global stock markets and commodities. Mr. Mobius is known as one of the pioneers of emerging market investing, and despite the bloodbath in emerging market stocks this year, he still sees plenty of investment opportunities. He also sees potential in gold, which has suffered from its own epic price crash in 2013.

Below is an edited transcript from our interview with Mr. Mobius.

Q It’s been a bloodbath for BRIC stocks and economies this year. Is there still opportunity there or should investors move on?

A There’s no question, they’ve bombed.

Overall, however, I think the BRIC countries will definitely have big comebacks, and they’ll do quite well, despite what we’ve seen recently. They’re huge, they have growth, and a lot of companies there are showing us sustained, strong earnings.

Q It’s also been a bad year to be a gold investor. Is the gold story over, or is this just a hiccup for the precious metal?

A There are really two markets in gold. There is the market price, and there is real demand. Market price is influenced by derivatives, by short sellers, by all kinds of actions by traders who are not taking physical delivery. And if you look at the recent downturn, imports into India went up, and physical demand went up. India is the largest importer of gold in the world, but gold prices still went down. So there’s a dichotomy between what’s happening in the market and what the real demand is.

In the short-term, there’s going to be a lot of pain

My personal opinion is, this big downturn we’ve seen is an aberration and you’ll probably see a return to the long-term growth trend of gold. But in the short-term, there’s going to be a lot of pain, basically prices coming down and looking like they’re not going to stop coming down. But at the end of the day, the demand is there and supply is limited. The cost of mining is not going down, but going up. So I would say I’m reasonably bullish on gold.

Q Where do you see oil prices heading over the next few years?

A Demand is running at about 90 million barrels a day. The demand in developed countries is flat, but demand in emerging countries is going up, and it’s beginning to match developed markets. We believe the growth in emerging markets will continue to grow. Automobile consumption is one example. If you look at auto sales in China, India, they’re going through the roof. That’s one side.

The other side is what’s happening in fracking and oil sands. A lot of people are saying these things are going to be game changers, they’ll change the whole equation of supply. But if you look at the amounts involved, it’s hard to believe that can happen, because you have 90 million barrels a day in demand, but oil sands and fracking in North America is about 500,000 barrels. In the context of global oil demand, this can’t have a big impact.

It could have a big impact on the U.S. in terms of influence, but it depends on how this thing goes. The numbers we’re getting suggests you have to continue drilling, because every time you drill a hole, production goes up, but then it goes down very quickly. So you have to keep drilling to make it viable, and that costs money. So you have to keep in mind, what is the cost of finding additional oil and pumping?

If you look at this picture, you can’t help but think the long-term trend for oil will be up.

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Q You talk a lot about frontier markets, and their importance in the emerging market story. Can you give us an example of a particularly promising frontier market you see a lot of opportunity in?

A There are a number of countries, but in terms of valuations, Vietnam is very undervalued. They do have all kinds of problems: problems with bureaucracy, problems with the government, but companies in many cases are very well run and are inexpensive. So I would say Vietnam is a target to look at. It’s a relatively big country, it’s strategically located, it’s got some oil offshore, it’s bordering China, right in the southeast Asian region, which is now booming.

And of course Thailand would be another, and further down the road, Myanmar. Basically a lot of the ASEAN countries, given the grouping together is roughly equal to China (in terms of population and economy). Which is why they’re getting together, because they have to find a way to balance China. They have a lot of free trade agreements, and I think going forward, there will be a lot of political union. That will be good for the whole region.

Q You’ve made some bullish calls on the Middle East in the past. Do you still see opportunities there given the ongoing turmoil?

A Yes, lots of opportunities. The markets have been hit because of the turmoil. Egypt would be a good example. You have a lot of protests and violence, but you have to remember, at the end of the day, life goes on. Companies still produce. Companies still sell. And those companies that are well placed, and have seen prices go down a lot, provide a good opportunity to buy. We’re not writing off these countries by any means and we’re looking forward to countries such as Libya [which are recovering from the effects of the Arab Spring] becoming a bigger part of the marketplace.

Q There’s been a lot of concern about what will happen to some emerging markets that are dependent on foreign inflows for growth, especially if the U.S. Federal Reserve starts cutting its QE program. Should investors be cautious on these countries, or are the fears overblown?

A Those countries that have poor balance of payments, that depend on outside flows, no doubt, they’ll be hit. Turkey is one example. While a lot of momentum has been built up in the domestic economy, they need that external funding. So any country that is in that kind of position has to be watched. Balance of payments, however, is only one factor.

This flow you’ve seen from global markets recently, including emerging markets, into the U.S., has been quite pronounced, and that has an impact. But I think it’s only short term. If you look at the U.S. [stock market], it’s performed very well and a lot of people have made a lot of money. But now the total investment basket is much bigger than it was. So investors now have the ability to diversify back into emerging markets, and eventually you’ll see the money moving back.

Q For China specifically, there’s been a lot of fears about how much its economy is going to slow. How worried are you about China right now?

A There’s no question that the days of double-digit growth are over. You have a huge economy, the second largest economy in the world, and that’s something you have to keep in mind. When people ask about soft to hard landing, I say they’re not landing. They’re going to continue to grow. Probably at high single digit numbers; we’re looking at 7.5% this year.

So we’re talking about a range of 5-7% over the next ten years, I would say. Because they’re determined to grow the economy. Wages are going up at a rapid pace. There’s a lot to be done, in terms of housing, in terms of infrastructure. And the realignment of the economy toward privatization is going to have a tremendous impact. They’ve already had some degree of privatization of state-owned enterprises, but they have a long way to go and that’s going to drive growth. So they still have more growth to undergo. Let’s put it this way; they’ll continue to have a lot higher growth than the West over the next decade.

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